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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarter ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from      to
 Commission file number 1-10877
 TERRA NITROGEN COMPANY, L.P.
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    73-1389684
(I.R.S. Employer Identification No.)Terra Centre 
PO Box 6000, 600 Fourth Street 
Sioux City, Iowa
(Address of principal executive office)
    
    51102-6000
(Zip Code)
 Registrants telephone number:
(712) 277-1340
 Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
 þ Yes o No
 Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act.
 o
Large accelerated
filer     þ
Accelerated filer     o Non-accelerated filer
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
 At the close of business on September 30, 2006, there were 18,501,576 Common Units and 184,072
Class B Common Units outstanding.




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##### 



TABLE OF CONTENTS
 Part I  FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheets
    
    
    3Consolidated Statements of Operations
    
    
    4Consolidated Statements of Cash Flows
    
    
    5Consolidated Statements of Partners Capital
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2.
    
    Management Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 4.
    
    Controls and Procedures
    
    
    19Part II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    20Item 1A.
    
    Risk Factors
    
    
    20Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 3.
    
    Defaults Upon Senior Securities
    
    
    20Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    20Item 5.
    
    Other Information
    
    
    20Item 6.
    
    Exhibits
    
    
    21302 Certification of Chief Executive Officer302 Certification of Chief Financial OfficerSection 906 Certification
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PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 TERRA NITROGEN COMPANY, L.P.
 
 CONSOLIDATED BALANCE SHEETS   unaudited
 September 30,
    
    December 31,
    
    September 30,2006
    
    2005
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    49,644
    
    
    $
    7,491
    
    
    $
    14,822Demand deposits with affiliate
    
    
    3⁄4
    
    
    
    26,505
    
    
    
    23,805Accounts receivable
    
    
    24,861
    
    
    
    32,088
    
    
    
    36,131Inventory
    
    
    25,841
    
    
    
    26,732
    
    
    
    25,108Prepaid insurance and other current assets
    
    
    2,688
    
    
    
    12,356
    
    
    
    35,184Total current assets
    
    
    103,034
    
    
    
    105,172
    
    
    
    135,050Property, plant and equipment, net
    
    
    75,748
    
    
    
    75,920
    
    
    
    74,250Other assets
    
    
    16,241
    
    
    
    10,200
    
    
    
    11,258Total assets
    
    $
    195,023
    
    
    $
    191,292
    
    
    $
    220,558LIABILITIES AND PARTNERS CAPITALCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    34,366
    
    
    $
    25,113
    
    
    $
    43,123Customer prepayments
    
    
    14,758
    
    
    
    31,673
    
    
    
    17,370Current portion of long-term debt and
capital lease obligations
    
    
    3⁄4
    
    
    
    12
    
    
    
    28Total current liabilities
    
    
    49,124
    
    
    
    56,798
    
    
    
    60,521Other long-term liabilities
    
    
    308
    
    
    
    135
    
    
    
    174Total liabilities
    
    
    49,432
    
    
    
    56,933
    
    
    
    60,695Partners capital:Limited partners interests
    
    
    162,120
    
    
    
    150,952
    
    
    
    164,888General partners interest
    
    
    (10,532
    )
    
    
    (10,644
    )
    
    
    (10,503
    )Accumulated other comprehensive income (loss)
    
    
    (5,997
    )
    
    
    (5,949
    )
    
    
    5,478Total partners capital
    
    
    145,591
    
    
    
    134,359
    
    
    
    159,863Total liabilities and partners capital
    
    $
    195,023
    
    
    $
    191,292
    
    
    $
    220,558
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TERRA NITROGEN COMPANY, L.P.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS   (unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Revenues
    
    $
    91,839
    
    
    $
    111,462
    
    
    $
    306,426
    
    
    $
    337,175Other
    
    
    175
    
    
    
    277
    
    
    
    196
    
    
    
    624Total revenues
    
    
    92,014
    
    
    
    111,739
    
    
    
    306,622
    
    
    
    337,799Cost of goods sold
    
    
    76,592
    
    
    
    92,387
    
    
    
    272,806
    
    
    
    267,943Gross profit
    
    
    15,422
    
    
    
    19,352
    
    
    
    33,816
    
    
    
    69,856Operating expenses
    
    
    2,226
    
    
    
    1,770
    
    
    
    6,291
    
    
    
    5,939Operating income
    
    
    13,196
    
    
    
    17,582
    
    
    
    27,525
    
    
    
    63,917Interest expense
    
    
    (110
    )
    
    
    (184
    )
    
    
    (329
    )
    
    
    (598
    )Interest income
    
    
    635
    
    
    
    314
    
    
    
    1,453
    
    
    
    1,037Net income
    
    $
    13,721
    
    
    $
    17,712
    
    
    $
    28,649
    
    
    $
    64,356Net income allocable to
limited partners interest
    
    $
    13,584
    
    
    $
    17,357
    
    
    $
    28,363
    
    
    $
    63,068Net income per limited
partnership unit
    
    $
    0.73
    
    
    $
    0.94
    
    
    $
    1.52
    
    
    $
    3.41
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TERRA NITROGEN COMPANY, L.P.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS   (unaudited)
 Nine Months EndedSeptember 30,2006
    
    2005Operating activities:Net income
    
    $
    28,649
    
    
    $
    64,356Adjustments to reconcile net income to net cash
flows from operating activities:Depreciation and amortization
    
    
    10,156
    
    
    
    11,045Gain on disposal of property, plant and equipment
    
    
    (1,311
    )
    
    
    3⁄4Non-cash loss (gain) on derivative instruments
    
    
    1,072
    
    
    
    3⁄4Changes in operating assets and liabilities:Receivables
    
    
    7,902
    
    
    
    (15,052
    )Inventories
    
    
    891
    
    
    
    (9,379
    )Accounts payable, accrued liabilities and
customer prepayments
    
    
    (5,104
    )
    
    
    (11,194
    )Other assets and liabilities
    
    
    5,638
    
    
    
    (19,813
    )Net cash flows from operating activities
    
    
    47,893
    
    
    
    19,963Investing activities:Capital expenditures
    
    
    (7,597
    )
    
    
    (5,141
    )Plant turnaround expenditures
    
    
    (9,390
    )
    
    
    (1,113
    )Proceeds from the sale of property, plant and equipment
    
    
    2,123
    
    
    
    4,991Change in demand deposits with affiliate
    
    
    26,505
    
    
    
    13,272Net cash flows from investing activities
    
    
    11,641
    
    
    
    12,009Financing activities:Repayment of long-term debt
and capital lease obligations
    
    
    (12
    )
    
    
    (8,235
    )Partnership distributions paid
    
    
    (17,369
    )
    
    
    (50,030
    )Net cash flows used in financing activities
    
    
    (17,381
    )
    
    
    (58,265
    )Net increase (decrease) in cash and cash equivalents
    
    
    42,153
    
    
    
    (26,293
    )Cash and cash equivalents at beginning of year
    
    
    7,491
    
    
    
    41,115Cash and cash equivalents at end of period
    
    $
    49,644
    
    
    $
    14,822Supplemental disclosure of cash flow information:Cash paid during the year for interest
    
    $
    190
    
    
    $
    176
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TERRA NITROGEN COMPANY, L.P.
 
 CONSOLIDATED STATEMENTS OF PARTNERS CAPITAL   (unaudited)
 AccumulatedLimited
    
    
    General
    
    
    Other
    
    
    TotalPartners
    
    
    Partners
    
    
    Comprehensive
    
    
    Partners
    
    
    Comprehensive(in thousands, except for Units)
    
    Interests
    
    
    Interests
    
    
    Income (Loss)
    
    
    Capital
    
    
    IncomePartners capital at January 1, 2006
    
    $
    150,952
    
    
    $
    (10,644
    )
    
    $
    (5,949
    )
    
    $
    134,359Net income
    
    
    28,363
    
    
    
    286
    
    
    
    3⁄4
    
    
    
    28,649
    
    
    $
    28,649Change in fair value of derivatives
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (48
    )
    
    
    (48
    )
    
    
    (48
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    28,601Distributions
    
    
    (17,195
    )
    
    
    (174
    )
    
    
    3⁄4
    
    
    
    (17,369
    )Partners capital at September 30, 2006
    
    $
    162,120
    
    
    $
    (10,532
    )
    
    $
    (5,997
    )
    
    $
    145,591Limited partner units issued and
outstanding at September 30, 2006:Common Units
    
    
    
    
    
    
    
    
    
    
    18,501,576Class B Common Units
    
    
    
    
    
    
    
    
    
    
    184,072Total units outstanding at September 30, 2006
    
    
    
    
    
    
    
    
    
    
    18,685,648
 AccumulatedLimited
    
    
    General
    
    
    Other
    
    
    TotalPartners
    
    
    Partners
    
    
    Comprehensive
    
    
    Partners
    
    
    Comprehensive(in thousands, except for Units)
    
    Interests
    
    
    Interest
    
    
    Income (Loss)
    
    
    Capital
    
    
    IncomePartners capital at January 1, 2005
    
    $
    150,850
    
    
    $
    (10,791
    )
    
    $
    (6,075
    )
    
    $
    133,984Net income
    
    
    63,068
    
    
    
    1,288
    
    
    
    3⁄4
    
    
    
    64,356
    
    
    $
    64,356Change in fair value of derivatives
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    11,553
    
    
    
    11,553
    
    
    
    11,553Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    75,909Distributions
    
    
    (49,030
    )
    
    
    (1,000
    )
    
    
    3⁄4
    
    
    
    (50,030
    )Partners capital at September 30, 2005
    
    $
    164,888
    
    
    $
    (10,503
    )
    
    $
    5,478
    
    
    $
    159,863Limited partner units issued and
outstanding at September 30, 2005:Common Units
    
    
    
    
    
    
    
    
    
    
    18,501,576Class B Common Units
    
    
    
    
    
    
    
    
    
    
    184,072Total units outstanding at September 30, 2005
    
    
    
    
    
    
    
    
    
    
    18,685,648
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TERRA NITROGEN COMPANY, L.P.
 
 Notes to Consolidated Financial Statements (Unaudited)
 1.
    
    Financial Statement PresentationBasis of PresentationThe condensed consolidated financial statements contained herein should be read in conjunction
with the consolidated financial statements and notes thereto contained in the Terra Nitrogen
Company, L.P. (TNCLP) Annual Report on Form 10-K for the year ended December 31, 2005. TNCLP
and its operating partnership subsidiary, Terra Nitrogen, Limited Partnership (the Operating
Partnership), are referred to herein, collectively, as the Partnership.The accompanying unaudited condensed consolidated financial statements reflect all adjustments,
which are, in the opinion of management, necessary for the fair statement of the results for
the periods presented. All of these adjustments are of a normal and recurring nature. Results
for the quarter are not necessarily indicative of future financial results of the Partnership.Derivatives and Financial InstrumentsThe Partnership accounts for derivatives in accordance with Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities,which
requires that derivatives be reported on the balance sheet at fair value and, if the derivative
is not designated as a hedging instrument, changes in fair value must be recognized in earnings
in the period of change. If the derivative is designated as a hedge and to the extent such
hedge is determined effective, changes in fair value are either (a) offset by the change in
fair value of the hedged asset or liability or (b) reported as a component of accumulated other
comprehensive income (loss) in the period of change, and subsequently recognized in the
determination of net income in the period that the offsetting hedged transaction occurs.Terra Industries Inc. and its subsidiaries (Terra) enter into derivative instruments with
counterparties for the Partnerships operations. When Terra enters into a derivative instrument
for the Partnerships operations, the Partnership simultaneously enters into a derivative
instrument with Terra as the counterparty. The terms of the derivative instruments between the
Partnership and Terra are identical to the terms of the derivative instruments between Terra
and Terras counterparty. The types of derivative instruments entered into include future
contracts, swap agreements, put and call options to cap or fix prices for a portion of the
Partnerships natural gas production requirements. Terra may also enter into similar derivative
instruments to fix or set floor prices for a portion of the Partnerships nitrogen sales
volumes.Revenue RecognitionRevenue is recognized when persuasive evidence of a transaction exists, delivery has occurred,
the price is fixed or determinable, no obligations remain and collectibility is probable. The
Partnership classifies any discounts and trade allowances as a reduction in revenue. Gains or
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losses associated with settled nitrogen derivative contracts are classified as revenue. The
Partnership classifies amounts paid by customers for shipping and handling as revenue.Cost of SalesThe cost of manufacturing fertilizer products is recorded when the fertilizer products are sold
and revenue is recognized. The Partnership classifies amounts paid by customers for shipping
and handling as cost of sales. Premiums paid for option contracts are deferred and recognized
in cost of sales in the month to which the related derivative transactions are settled.
Realized gains and losses on derivatives activities are recognized in cost of sales.InventoriesInventories are stated at the lower of average cost or estimated net realizable value. The
Partnership performs a monthly analysis of its inventory balances to determine if the carrying
amount of inventories exceeds its net realizable value. The analysis of estimated realizable
value is based on customer orders, market trends and historical pricing. If the carrying amount
exceeds the estimated net realizable value, the carrying amount is reduced to the estimated net
realizable value.Production costs include the cost of direct labor and materials, depreciation and amortization,
and overhead costs related to manufacturing activities. The cost of inventories is determined
using the first-in, first-out method.Impairment of Long-Lived AssetsThe Partnership reviews its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum
of the undiscounted future cash flows expected to result from the use of the asset is less than
the carrying amount of the asset, an impairment loss is recognized based on the difference
between the carrying amount and the fair value of the asset.Natural Gas Futures, Swaps, Options and Basis SwapsThe estimated fair value of each class of derivatives is based on published referenced prices
and quoted market prices from brokers.Cash and Cash EquivalentsThe Partnership classifies cash and short-term investments with an original maturity of three
months or less as cash and cash equivalents. Demand deposits with affiliate are not classified
in cash and cash equivalents.
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Demand Deposits with AffiliateThe Partnership has an arrangement for demand deposits with an affiliate to allow for excess
Partnership cash to be deposited with Terra Capital, Inc. (Terra Capital), the indirect
parent of the General Partner. Excess Partnership cash is received by Terra Capital and earns
interest until the funds can be transferred to Partnership accounts for disbursements. Cash
balances are transferred to the Partnership from Terra Capital on a weekly basis. Amounts on
deposit with Terra Capital earn interest at the rate that Terra Capital receives on its pooled
cash investments. The Partnership believes that Terra Capital and its parent, Terra Industries
Inc., have sufficient credit available under its existing borrowing agreements combined with
cash on hand to fully fund all obligations to the Partnership, upon request. However, the
Partnership does have credit risks with deposits held by Terra Capital in the event of
bankruptcy by Terra or its subsidiaries. The Partnership may be unable to obtain its funds on
demand in such a situation.During the 2005 fourth quarter, the Partnership changed its accounting policy concerning
classification of cash deposited with Terra Capital. The new policy results in the
reclassification of deposits with Terra Capital from cash and cash equivalents to demand
deposits with affiliate on the balance sheet and cash flows arising from deposits in and
withdrawals from such demand deposits as a cash flows from investing activities. For the
September 30, 2005 balance sheet, the Partnership has reclassified $23.8 million of demand
deposits with affiliate that was presented as cash and cash equivalents in the original Form
10-Q filed on November 10, 2005. In connection with this balance sheet reclassification, the
Partnership reclassified the cash and cash equivalent balance and included the $13.3 million
investing activity effect of such reclassification in its September 30, 2005 statement of cash
flows. There was no impact to Partners capital or net income as a result of this change.The Partnership believes that presenting the related party deposits in a separate balance sheet
caption and presenting related party deposits and withdrawals as an investing activity in the
statement of cash flows is preferable because the separate presentation (1) is more consistent
with the nature of the deposit, which is subject to credit risk and is not a deposit in a
financial institution and (2) more clearly presents the related party nature of the cash
management arrangement with Terra Capital.Although none of the agreements or conditions governing these deposits has changed, the
Partnership has elected to change the presentation of such deposits to show them as a separate
current asset and not as a cash equivalent. The Partnership continues to have the contractual
right to withdraw these funds on demand and continues to have the ability to access funds
deposited in these accounts on a daily basis. The Partnership may terminate such cash
management arrangement at any time.Use of Estimates in Preparation of the Financial StatementsThe preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.2.
    
    Agreement of Limited Partnership
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The Partnership makes quarterly cash distributions to Unitholders and the General Partner in an
amount equal to 100% of its Available Cash as defined in the Partnership Agreement.In the first nine months of 2006, the Partnership paid $17.4 million in cash distributions to
its partners. In the first nine months of 2005 the Partnership paid $50.0 million in cash
distributions to its partners.At September 30, 2006, the General Partner and its affiliates owned 75.3% of the Partnerships
outstanding units. When less than 25% of the issued and outstanding units are held by
non-affiliates of the General Partner, the Partnership, at the General Partners sole
discretion, may call, or assign to the General Partner or its affiliates, its right to acquire
all such outstanding units held by non-affiliated persons. If the General Partner elects to
acquire all outstanding units, the Partnership is required to give at least 30 but not more
than 60 days notice of its decision to purchase the outstanding units. The purchase price per
unit will be the greater of 1) the average of the previous 20 trading days closing prices as
of the date five days before the purchase is announced and 2) the highest price paid by the
General Partner or any of its affiliates for any unit within the 90 days preceding the date the
purchase is announced. Additional purchases of common units by the General Partner may be
restricted under the terms of Terras bank credit agreement as described therein.3.
    
    Net Income per Limited Partnership UnitBasic income per unit data is based on the weighted-average number of Partnership Units
outstanding during the period. Diluted income per unit data is based on the weighted-average
number of Partnership Units outstanding and the effect of all dilutive potential common units.The following table provides the components of basic income per unit for the three- and
nine-month periods ended September 30, 2006 and 2005:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(in thousands, except per-share amounts)
    
    2006
    
    2005
    
    2006
    
    2005Basic income per limited Partnership
unit computation:Net income allocable to limited
Partners interest
    
    $
    13,584
    
    
    $
    17,357
    
    
    $
    28,363
    
    
    $
    63,068Weighted average units outstanding
    
    
    18,686
    
    
    
    18,562
    
    
    
    18,686
    
    
    
    18,502Net income per limited Partnership unit
    
    $
    0.73
    
    
    $
    0.94
    
    
    $
    1.52
    
    
    $
    3.41
 There were no dilutive Partnership units outstanding for the three- and nine-month periods
ended September 30, 2006 and 2005.4.
    
    InventoriesInventories consisted of the following:
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September 30,
    
    December 31,
    
    September 30,(in thousands)
    
    2006
    
    2005
    
    2005Materials and supplies
    
    $
    9,625
    
    
    $
    7,287
    
    
    $
    6,361Finished goods
    
    
    16,216
    
    
    
    19,445
    
    
    
    18,747Total
    
    $
    25,841
    
    
    $
    26,732
    
    
    $
    25,108
 Inventory is valued at actual first in, first out cost. Costs include raw material, labor and
overhead.5.
    
    Derivative Financial InstrumentsThe Partnership manages risk using derivative financial instruments for changes in natural gas
supply prices and changes in nitrogen prices. Derivative financial instruments have credit risk
and market risk.Terra enters into derivative instruments with counterparties for the Partnerships operations.
When Terra enters into a derivative instrument for the Partnerships operations, the
Partnership simultaneously enters into a derivative instrument with Terra as the counterparty.
The terms of the derivative instruments between the Partnership and Terra are identical to the
terms of the derivative instruments between Terra and Terras counterparty. Terra will not
enter into transactions with a counterparty if the additional transaction will result in credit
exposure exceeding $20 million. The credit rating of counterparties may be modified through
guarantees, letters of credit or other credit enhancement vehicles.The Partnership classifies a derivative financial instrument as a hedge if all of the following
conditions are met:
 1.
    
    The item to be hedged must expose the Partnership to currency or price risk.2.
    
    It must be probable that the results of the hedge position substantially offset
the effects of currency or price changes on the hedged item (e.g., there is a high
correlation between the hedge position and changes in market value of the hedge item).3.
    
    The derivative financial instrument must be designated as a hedge of the item
at the inception of the hedge.
 Natural gas supplies to meet production requirements at the Partnerships production facilities
are purchased at market prices. Natural gas market prices are volatile and the Partnership
effectively hedges a portion of its natural gas production requirements and inventory through
the use of futures contracts, swaps and options. These contracts reference physical natural gas
prices or approximate NYMEX futures contract prices. Contract physical prices are frequently
based on prices at the Henry Hub in Louisiana, the most common and financially liquid location
of reference for financial derivatives related to natural gas. However, natural gas supplies
for the Partnerships production facilities are purchased at locations other than Henry Hub,
which often
creates a location basis differential between the contract price and the physical price of
natural gas. Accordingly, the use of financial derivatives may not exactly offset the changes
in the price of physical gas. The contracts are traded in months forward and settlement dates
are scheduled to coincide with gas purchases during that future period.
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A swap is a contract between the Partnership and a third party to exchange cash based on a
designated price. Option contracts give the holder the right to either own or sell a futures or
swap contract. The futures contracts require maintenance of cash balances generally 10% to 20%
of the contract value and option contracts require initial premium payments ranging from 2% to
5% of contract value. Basis swap contracts require payments to or from the Partnership for the
amount, if any, that monthly published gas prices from the source specified in the contract
differ from the prices of a NYMEX natural gas futures during a specified period. There are no
initial cash requirements related to the swap and basis swap agreements.The following summarizes the position of open natural gas derivative contracts at September 30,
2006, December 31, 2005 and September 30, 2005:
 Other
    
    
    AccruedCurrent
    
    
    Current
    
    
    Net(in thousands)
    
    Assets
    
    
    Liabilities
    
    
    Asset (Liability)September 30, 2006
    
    $
    1,868
    
    
    $
    (8,938
    )
    
    $
    (7,070
    )December 31, 2005
    
    
    6,809
    
    
    
    (13,801
    )
    
    
    (6,992
    )September 30, 2005
    
    
    31,451
    
    
    
    (25,504
    )
    
    
    5,947
 Certain derivatives outstanding at September 30, 2006 and 2005, which settled during October
2006 and 2005, respectively, are included in the position of open natural gas derivatives in
the table above. The October 2006 derivatives settled for an approximate $6.1 million loss. All
open derivatives will settle during the next 12 months.At September 30, 2006, the Partnership determined that certain derivative contracts were
ineffective hedges for accounting purposes and recorded a charge of $0.8 million and $1.1
million to cost of sales for the three- and nine-month periods ending September 30, 2006,
respectively. Derivatives outstanding at September 30, 2005 included gains of $0.2 million and
$0.5 million that were recorded as an ineffective position and credited to cost of sales for
the three- and nine-month periods ending September 30, 2005, respectively.The effective portion of gains and losses on settlement of these contracts that qualify for
hedge treatment are carried as accumulated other comprehensive income (loss) and are credited
or charged to cost of sales in the month in which the hedged transaction settles. Gains and
losses on the contracts that do not qualify for hedge treatment are credited or charged to cost
of sales based on the positions fair value. The risk and reward of outstanding natural gas
positions are directly related to increases or decreases in natural gas prices in relation to
the underlying NYMEX natural gas contract prices.The activity related to accumulated other comprehensive income (loss) for the nine month
periods ended September 30, 2006 and 2005 is:
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##### Table of Contents



(in thousands)
    
    2006
    
    2005Beginning accumulated (loss)
    
    $
    (5,949
    )
    
    $
    (6,075
    )Reclassification into earnings
    
    
    22,402
    
    
    
    (2,888
    )Net change associated with current period hedging transactions
    
    
    (22,450
    )
    
    
    14,441Ending accumulated gain (loss)
    
    $
    (5,997
    )
    
    $
    5,478
 Approximately $6.0 million of the accumulated other comprehensive loss at September 30, 2006
will be reclassified into earning during the next twelve-month period ending September 30,
2007.At times, the Partnership also uses forward derivative instruments to fix or set floor prices
for a portion of its nitrogen sales volumes. At September 30, 2006, the Partnership had no open
contracts covering nitrogen solutions. When outstanding, the nitrogen solution contracts do not
qualify for hedge treatment due to inadequate trading history to demonstrate effectiveness.
Consequently, these contracts are marked-to-market and unrealized gains or losses are reflected
in revenue in the statement of operations. For the three- and nine-month periods ending
September 30, 2006, there were no gains or losses on nitrogen forward derivative instruments.
For the three- and nine-month periods ending September 30, 2005, approximately $0.2 million and
$1.7 million of losses, respectively, were recognized on nitrogen forward derivative
instruments.6.
    
    Long-Term DebtOn December 21, 2004, the Partnership entered into a $50.0 million revolving bank credit
facility that expires in June 2008 and bears interest at a variable rate plus a margin (London
Interbank Offer Rate (LIBOR) plus 175 basis points, or 7.07% at September 30, 2006). Under the
credit facility, the Partnership may borrow an amount generally based on eligible cash
balances, 85% of eligible accounts receivable and 60% of eligible finished goods inventory,
less outstanding letters of credit. The Partnerships borrowings under the credit facility are
secured by substantially all of its working capital. The agreement also requires the
Partnership to adhere to certain limitations on additional debt, capital expenditures,
acquisitions, liens, asset sales, investments, prepayments of subordinated indebtedness,
changes in lines of business and transactions with affiliates. At September 30, 2006, the
Partnership had $50.0 million of borrowing availability, and, there were no outstanding
borrowings or letters of credit under the facility.7.
    
    New Accounting PronouncementsIn September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) 157,
Fair Value Measurements(SFAS 157). SFAS 157 is definitional and disclosure oriented and
addresses how companies should approach measuring fair value when required by generally
accepted accounting principles (GAAP); it does not create or modify any current GAAP
requirements to apply fair value accounting. SFAS 157 provides a single definition for fair
value that is to be applied consistently for all accounting applications, and also generally
describes and prioritizes according to reliability the methods and inputs used in valuations.
SFAS 157 prescribes various disclosures about financial statement categories and amounts which
are measured at fair
value, if such disclosures are not already specified elsewhere in GAAP. The new measurement and
disclosure requirements of SFAS 157 are effective for the Company in the first quarter of 2008.
The Company expects no significant impact from adopting the Standard.
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##### Table of Contents



In September 2006, the SEC issued Staff Accounting Bulletin 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
(SAB 108). SAB 108 provides interpretive guidance on how the effects of prior-year uncorrected
misstatements should be considered when quantifying misstatements in the current year financial
statements. SAB 108 requires registrants to quantify misstatements using both an income
statement and balance sheet approach and then evaluate whether either approach results in a
misstatement that, when all relevant quantitative and qualitative factors are considered, is
material. If prior year errors that had been previously considered immaterial now are
considered material based on either approach, no restatement is required so long as management
properly applied its previous approach and all relevant facts and circumstances were
considered. If prior years financial statements are not restated, the cumulative effect
adjustment is recorded in opening Partners Capital as of the beginning of fiscal year of
adoption. SAB 108 is effective for the Partnership at the end of 2006. The Partnership is
currently assessing the impact the adoption of SAB 108 will have on its Consolidated Financial
Statements.
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Introduction
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Dependence on Terra Industries
  Three months ended September 30, 2006 compared with
three months ended September 30, 2005
  2006
    
    2005Volumes
    
    Unit Price
    
    Volumes
    
    Unit Price(000 tons)
    
    ($/ton)*
    
    (000 tons)
    
    ($/ton)*Ammonia
    
    
    49
    
    
    $
    301
    
    
    
    45
    
    
    $
    329UAN
    
    
    522
    
    
    $
    125
    
    
    
    578
    
    
    $
    150
 
 *
    
    After deducting outbound freight costs   Nine months ended September 30, 2006 compared with
nine months ended September 30, 2005
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##### Table of Contents



2006
    
    2005Volumes
    
    Unit Price
    
    Volumes
    
    Unit Price(000 tons)
    
    ($/ton)*
    
    (000 tons)
    
    ($/ton)*Ammonia
    
    
    168
    
    
    $
    367
    
    
    
    207
    
    
    $
    310UAN
    
    
    1,521
    
    
    $
    139
    
    
    
    1,655
    
    
    $
    148
 
 *
    
    After deducting outbound freight costs   Capital resources and liquidity
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##### Table of Contents



ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4. CONTROLS AND PROCEDURES
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FORWARD LOOKING PRECAUTIONS
  
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
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ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
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ITEM 6. EXHIBITS
 (a) Exhibits:
 Exhibits *31.1
    
    Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002Exhibits *31.2
    
    Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002Exhibit *32
    
    Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 
 *
    
    filed herewith 21




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SIGNATURE
  TERRA NITROGEN COMPANY, L.P.By:
    
    TERRA NITROGEN GP INC. 
as General PartnerBy:
    
    /s/ Francis G. Meyer

Francis G. MeyerVice President (Principal Accounting Officer)
  22